Iran able to withstand cheap oil by cutting subsidy payments

Iran able to withstand cheap oil by cutting subsidy payments

Former Iranian Oil Ministry senior official and energy expert Mahmoud Khagani's exclusive article for Trend.

Lower oil prices in short term in my view may not affect Persian Gulf OPEC members' economy too much. They have small population and huge currency reserves that can help them to stand low oil prices for couple of years. But, they have other expenditures on their hand that may make life difficult for them, such as helping military government to come to power in some countries and helping ISIL in Iraq and Syria. Therefore, they need to be worried for medium and long term effect of lower oil price on their income.

In case the world becomes a normal place for all, then for medium and long term OPEC members in general will be better off. Because, there is no doubt that producing oil in expensive areas will become uneconomical, that include shale oil and shale gas.

It also should be noted that some OPEC members have invested in downstream and they can export petroleum products instead of crude oil.

With regard to Iran, I may say that Iran has already been used to hardship. Iran could stand the situation in case government can convince people to stand behind the government and allow it to stop cash energy subsidy payment to people.

The Iranian government deposits $1.4 billion to people's bank accounts monthly as a compensation for cutting energy subsidies.

Of course, the government needs to gain people's trust and support by convincing them that it has policies to correct mismanagements of public funds fighting corruption which people experienced during previous administration.

Lower oil prices provide an opportunity for Iran to attract foreign investment in its petroleum industry both upstream and downstream. What we all expect about the 5+1 negotiations with Iran and some experts say if the results are positive then investments and trade will flourish, is reference to the fact that those small political minorities in Tehran, Washington, London and elsewhere who are friends behind the scenes and together enjoy economic benefits of what is known as by passing sanctions will become null and void, curtains will be pushed aside and their faces will be exposed. They are oligarchs and we have to wait and see to what extend their powers and influence will be checked due to current low oil prices.

About downstream sector in Iran which has been privatized, Iranian people now realize that the policy of privatization that was carried out during previous administration headed by Mahmould Ahmadinejad were more or less the same style as people of Russia experienced during Yeltsin era.

I don't agree that new owners of Iran downstream energy sector are losing profits. The owners of Petrochemicals, power generating plants and refineries in Iran have already got back their original investment and their profit margins have so far been also very satisfactory for them. To explain why the share prices are low in the stock exchange we need to be investigated and find out who benefits of lower share prices for putting the government more pressure to submit to their request for not increasing the feed price particularly for Petrochemical industry.

Other facts are also involved such as facing competition with rival producers in case sanctions are eased or removed it is obvious that consumers will turn to cheaper and better quality goods and commodities. Therefore, oligarchs who used to easy and high revenues in Iran's downstream sector during past 3-4 years should now reconsider their position domestically and internationally. They need more management skill to face new situation. They must also now stand behind government and help the government to pass through current low revenue era due to lower oil prices.

With regard to other OPEC members, one has to take this fact into consideration that in those countries alongside the government owned companies there are international companies too. The petroleum industry in these countries, are integrated in a way that in case they are losing on upstream side they gain on downstream and in other sectors of the industry. Their economy structure also allows them to stand current situation.

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Mahmood Khaghani, now retired, had over 33 years of service in senior international positions in the Iranian petroleum industry, including as the head of the Oil Ministry's Caspian Sea and Central Asia Department, also the business development and joint ventures advisor of Iran's North Drilling Company . He was also the director for energy, minerals and environment at the ECO Secretariat in 1996-2000.

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